Lufthansa Cargo swung in dramatic fashion from an adjusted operating loss of €50 million (US$61 million) in 2016 to an adjusted operating profit of €242 million (US$296 million) for 2017, in a year which took the entire industry by surprise.
“Normally managers don’t like to state that they were wrong, but what I have to do is precisely that,” said Peter Gerber, CEO and chairman of the executive board at Lufthansa Cargo, speaking at the carrier’s annual press conference in Frankfurt. “We were wrong. We were tremendously wrong, because last year, when we previewed what might happen in 2017, we said that if everything went in the right direction then maybe we would be able to reach a result which was slightly below zero, and we expected to be back on the positive side only in 2018.”
Revenue grew by 21.1% year-on-year to €2.5 billion (US$3.1 billion), while revenue tonne-kilometres increased by 6.0% to almost 8.9 billion.
“Our freighter capacity went up by 3.8%, while belly capacity was up 1.1%,” said Martin Schmitt, CFO and member of the executive board responsible for human resources at Lufthansa Cargo.
“This was because we were able to put all 12 MD-11Fs into service again, after having taken a few out of service earlier.”
Demand increased by 6.9% for freighter capacity and 4.9% for belly capacity, which led to the overall load factor growing by 2.3 percentage points to 69.1%. The carrier’s yield also rose by 14%.
“This was one of the best results in the history of Lufthansa Cargo,” said Gerber. “All in all, we were much more successful than we expected and, to be honest, we were lucky. We put capacity away and restructured when the crisis set in, and we were able to complete it when the market came back. With such perfect timings, we really cut our costs to a competitive base and we were very successful on the revenue side.”
After the disappointments and missed targets of 2016, Lufthansa Cargo was forced to forgo plans for a new cargo terminal called the LCCneo in the face of the market crisis. But even before that, the company had already begun to ask itself some existential questions when its earnings started sliding in 2015.
“One of our answers was the biggest restructuring in the history of Lufthansa Cargo, our C40 programme,” Gerber said. “The second pillar was the adoption of our strategy, called Cargo Evolution. Now I’m very happy to state that we’re back on the right path of success and growth.”
After the LCCneo project was abolished, Lufthansa Cargo came up with a new plan called the LCCevo as an alternative. Gerber said that this fits much better into the environment today because it gives the carrier good possibilities to modernize its ground infrastructure in Frankfurt and to be as flexible as it needs to be.
“This means we’re taking a modular approach and doing things step-by-step to renew everything which needs to be renewed,” he said. “This will take about four to five years, but afterwards we will have a completely renewed Lufthansa Cargo Center, which is good news for our customers.”
As part of that modular approach, Lufthansa Cargo opened an extension to its Cool Center at Frankfurt Airport on March 1, 2018, and now has a total of 8,000 square metres of cool chain space. A similar temperature-controlled facility is being planned at Munich Airport.
“Cool cargo is a huge part of our business and is growing like hell,” said Gerber. “Demand is very high and customer needs are rising, so this is why we’ve expanded our Cool Center in Frankfurt. It’s also why we’re doing something in Munich. But it’s not only Munich – we’re looking around the world to see whether we can establish a cool network that includes all the important hotspots for our customers.”
Lufthansa Cargo’s current fleet consists of five Boeing 777Fs and 12 MD-11Fs. Because the policy of the Lufthansa Group is not to use aircraft that are more than 25 years old, the company has until about 2025 to complete the replacement of its MD-11Fs, the youngest of which was delivered in 2001.
“For now we’re looking for opportunities to do this earlier and I’m quite optimistic that we will see something in that respect,” Gerber said. “In terms of capacity and productivity, one 777F is equal to 1.6 MD-11Fs. This means that for a complete rollover of 12 MD-11Fs, we’ll have to buy seven 777Fs by 2025. Of course, this could change if the market changes and there is more demand, but that’s the plan at the moment.”
Gerber said that, rather than predict what will happen in the year ahead, it is more useful to talk about the long-term factors that will affect the industry. With global economic growth still strong so far, populations and wealth rising, and technological progress accelerating, he said he foresees substantial and solid growth for the next few years.
Having now achieved a cost reduction of €72 million (US$88 million) within two years, Lufthansa Cargo is on track to complete the C40 cost reduction programme during this year and can focus its attention on partnerships, new customer segments and digitization as part of the Cargo Evolution strategy.
In addition to the joint venture with ANA Cargo, Lufthansa Cargo is due to begin a JV with United Cargo later this year. The joint business agreement with Cathay Pacific, which started in 2017, will also extend to the Europe-Hong Kong direction after the summer.
In terms of new segments, Gerber said that, given the booming e-commerce market, the carrier is looking for possibilities to fulfil its customer needs.
“We’re working very heavily on that and are in the process of developing a product for this segment,” he said. “I believe we’ll see something there later this year.”
As for digitization, Lufthansa Cargo interprets this as encompassing automation, the customer experience, services and new business models.
“In some respects, we’re a bit behind with this and are stuck in the 70s or 80s, with a lot being done by phone and by people,” said Gerber. “It’s pretty clear that we have to raise this to another level.”
He is particularly keen on the idea of a data cloud where all participants in the transport chain are able to put their data into a single location.
“Imagine how much money we could save,” he said. “Imagine how many errors we could delete. Imagine how we could raise the quality. We believe it’s worth working on this and we have to start now. We’re doing prototyping and we’ll have to see how far this develops, but I’m pretty sure that when this works out it will be a very big step for the whole industry.”
While bad times present a huge challenge for every industry, Gerber admitted that this is especially true for air cargo because it is behind by about 30-40 years, but he is hopeful that this will soon change.
“During the next five or six years, I believe that we will do things in one step that other industries have taken three or four steps to do,” he said. “So it’s quite thrilling to be in this industry and I’m happy to be here.”
By Jeffrey Lee
Asia Cargo News | Frankfurt